Observations

Reforming welfare: less haste, more detail please

Date: 30 September 2010
Authors:
Publisher: IFS

In July, the Department of Work and Pensions published a consultation paper, 21st Century Welfare, which sought views on its ideas for fundamental reforms to the benefits and tax credits system. We wrote about the document when it was published, and today we are publishing our formal response. The Government has also set an ambitious timetable for these reforms: it would like to bring forward legislation early in 2011, which would presumably require a White Paper later this year, after October's Spending Review.

The DWP consultation document argues that there are substantial attractions to a more integrated benefits and tax credits system: it would reduce the government's administration costs and the amount of money lost to fraud and error, and be simpler for claimants to understand, which might in itself encourage some to enter paid work. We agree with this assessment, and consider there to be a strong case for integrating all benefits and tax credits into a single benefit. Such a substantial upheaval would come with risks, of course; if those risks look too daunting, then the Government must seek integration or alignment on a smaller scale wherever possible. We urge the Government to improve the way that housing benefit and council tax benefit interact with tax credits for those in work, reduce the number of distinct out-of-work benefits, and have a single government department - presumably the DWP - responsible for policy and administration of all benefits and tax credits.

The DWP consultation document also suggests that work incentives need to be strengthened. This is a separate issue from simplification and integration: benefits and tax credits could be integrated without altering anyone's entitlement or their financial work incentives, and work incentives could be strengthened within the current set of benefits and tax credits. The DWP document does not specify which groups it is most concerned about, and so it is not possible to suggest what direction reforms might take.

There are countless different ways to design an integrated benefit. The Government has a preferred option which it refers to as a Universal Credit and which is based on a proposal of the Centre for Social Justice. Its unique selling point is that it would have a single rate of withdrawal, which would be lower than some of the effective rates of withdrawal that can exist at present when benefits and tax credits overlap; such a system would be more transparent and should be simpler for recipients to understand. But there may be other designs which are just as good at achieving the Government's objectives. The Government will need to do a great deal more explaining of how a Universal Credit would work and how much different groups of recipients will get if we are to have an informed debate on its merits. We are reminded of a remark we made in 2001, when the previous government was consulting on its intention to introduce the child and working tax credit: "A recent consultation document provided some detail of how the credits would work, but said little on the most important features. Although it invited views on key issues, it provided no quantitative evidence on which one might base a sensible response." We hope that the current Government will do better, by ensuring that any forthcoming White Paper on welfare reform provides enough information to facilitate public debate on what could be one of the most important changes brought about by this Government. In this respect, the planned short period of time between now and legislation is not a good omen.